MERRILL Lynch and other investment banks aren't the only New York institutions having to rethink their projections in light of the financial-market turmoil. Last Friday, Mayor Bloomberg's budget wonks drastically revised next year's deficit for the city itself - pushing the expected budget gap up 76 percent, from $1.6 billion to $2.7 billion.

It's becoming obvious that next year's budget hole will be deep; the real question is how long the problems will last. A protracted downturn would look different - and feel different to the city's residents and workers - from the relatively short one that New York experienced a few years ago.

The immediate problem: Half that 76 percent rise in next year's deficit comes from a drop in the projected tax take: Since June, budget officials have cut their estimate of next year's tax revenues by $600 million.

That drop reflects the recent financial-market mess. Over the last half-decade, New York banks have structured and sold hundreds of billions of dollars' worth of dubious mortgage-backed bonds - and investors around the world have now come to doubt the quality of those bonds.

Potential buyers are questioning the assumptions banks made in structuring securities out of millions of the riskiest U.S. mortgages, especially because it seems like one assumption was that the nation's property values would keep on growing at a fast clip every year.

So investors have gone on strike - refusing to buy until they figure out what's going on. Plus, they've been scrutinizing other lending areas, to see if bankers made similarly shaky assumptions elsewhere.

Largely thanks to severely eroded values of mortgage-backed and other highly structured securities, banks have had to write down $27 billion-plus worth of losses over the last month or so.

Ordinarily, these hits (and the city's revising of its revenue projections) would be good news - that is, a healthy response to bad news: Once you figure out the extent of your problem, and take your lumps, you can move on.

Consider the tech bubble's burst back in 2000: After a few months of uncertainty, it became relatively easy for each institution to figure out how much it had lost - freeing it to move on to the next big thing.

Looking back, it's clear that New York recovered quickly (especially given the 9/11 attacks). Yes, Mayor Bloomberg hiked property taxes permanently, and personal-income and sales taxes temporarily. But it was mostly the economic upturn, not those tax hikes, that soon brought revenues pouring in at record levels and made the fiscal crunch of 2002-'03 seem like a bad dream.

Those tax hikes didn't drive people away because rising property values may have left homeowners feeling richer, despite their property taxes; the new boom on Wall Street certainly cushioned the income-tax hit for top earners. And nobody saw a drop-off in city services even as they were paying those higher taxes.

This time, it seems that the city is facing the facts squarely by quickly revising revenues down as Wall Street does the same. Problem is, it's not clear when Wall Street and the city will know the real extent of the problems and how long they'll last.

Why the greater uncertainty this time around? First, it's harder to value a unique, complex asset-backed bond than a share of publicly traded stock.

Second, investors have to be confident that banks, hedge funds and other institutions have really taken all their losses - and not just restructured and re-sold some complicated securities among themselves.

Third, there's national political pressure to artificially prop up home values (which help determine the worth of all those securities) for as long as possible, in particular by stalling foreclosures.

The biggest long-term problem, though, may be that investors jumped into all kinds of securitizations, not just mortgage-backed bonds, because they trusted Wall Street's complex, opaque valuation of such assets, and were sure they could quickly sell these assets into robust markets whenever they pleased. But now both those assumptions have proven false; they may not jump back into these markets anytime soon.

And without robust activity on Wall Street - from heavy, securitization-based lending, or something new to replace it - the city will have to deal not only with next year's budget deficit, but a nearly $5 billion deficit the year after that, and then a $6.5 billion budget hole as the next mayor takes office.

Worse, the city may well have learned the wrong lessons from the last budget crunch and its aftermath: that it's OK to sharply and suddenly raise taxes as a bridge to the good times, which are sure to return shortly.

If Bloomberg or his successor drastically hikes taxes again, the city might not suffer an exodus of taxpayers and employers - but only if Wall Street roars back to health in the two years or so after the tax hikes (as it did last time 'round), shrugging off those tax hikes and keeping the business coming.

Tax hikes without a quick Wall Street recovery wouldn't be enough to close a $5 billion or $6 billion budget gap several years running without driving affluent and middle-class New Yorkers and their employers away. Such flight would mean fewer affluent people to pay the high taxes - which inevitably would mean tough spending cuts.

But complicating such spending cuts is the fact that half of the tax-funded budget - pensions and health benefits for city workers, Medicaid, payments on the city's debt - is off-limits to such cuts in any given year. The city can't simply slash its pension contributions and debt-service payments by, say, 10 percent to close a budget deficit - these are contractual and legal obligations.

(In fact, the latest projections show the city spending $1.6 billion a year more within three years than it had previously expected to spend, thanks to Bloomberg's recent and expected future agreements with the city's unions.)

It takes years of reform to make progress on these costs, reform that should have started in the good times. Continued budget inflexibility means that, in a long-ish downturn, the city will have to make bigger cuts in the other parts of the budget - including basic services.

An expert manager might wring efficiencies out of lower spending rather than just slash basic services. But it's as likely that we'd be paying more in taxes and getting worse services. And that's sure to push more New Yorkers away, causing an even bigger deficit (and so on).

The challenge is to come up with an "exit strategy" from fiscal crisis that doesn't depend on a quick Wall Street recovery.